Where we see income opportunities as the Fed winds down stimulus
We share how we employ a flexible approach to tap into income opportunities.
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Key takeaways:
- We believe opportunities for consistent yield1 with relatively lower volatility can still be found in the current inflationary environment.
- Employing a flexible fixed income approach2 is key when seeking yield opportunities1.
While some investors are debating whether the current inflationary environment is transitionary or more complex, we believe that it is still possible to find consistent yield opportunities1 with relatively lower volatility.
Employing a flexible approach2 can help find relatively attractive yield opportunities1 across the full spectrum of fixed income.
1. What is a flexible fixed income strategy2?
- Fixed income covers a wide range of sectors. In addition to traditional fixed income such as government bonds and investment-grade (IG) corporate bonds, there are also extended sectors such as high-yield (HY) corporate bonds3 and securitised credit4.
- As a part of overall portfolio allocation, a flexible fixed income strategy goes beyond these traditional sectors in the search for yield opportunities2. It invests opportunistically across an extensive range of sectors and geographies in the fixed income universe.
Provided for illustrative purposes only not to be construed as research or investment advice. Not all investments are suitable for all investors.
2. Why do we include non-traditional sectors in our fixed income portfolios?
Combatting inflation
Diversifying risk factors
A wider source of income
- Interest rates have stayed low for longer and traditional income sources such as government bonds are yielding less than inflation, prompting some investors to look for more attractive income prospects.
- Inflation5 has been picking up in the US where the core rate was 2.6% in March 2021, rising to 4.2% in April and stood at 5.0% in May. On the contrary, 10-year government bonds in the US stood at 1.5% as of June6.
6. Source: FactSet, J.P. Morgan Asset Management, Tullet Prebon. Data as of 30.06.2021. Past performance is not a reliable indicator of current and future results. Yield is not guaranteed. Positive yield does not imply positive return.
- There are different types of risk factors driving the movement of yields2. Yields of individual traditional sectors tend to be affected by single or a few risk factors3. For example, US Treasury yields are solely affected by interest rate movements.
- Even for the same risk factor, the impact on the various fixed income sectors can also be different.
- Bonds react differently in a rising rate environment. Take US HY bonds and emerging market debt as examples, they have relatively higher chances to deliver positive total returns in a rate hike environment3.
- As a part of overall portfolio allocation, investing dynamically in multiple types of fixed income sectors allows a wider source of income opportunities which are less likely to be impacted by a single risk factor. This can create income from a more balanced combination of fixed income sectors and help diversify portfolio risks.
A spectrum of fixed income yields7
7. Source: Barclays, Bloomberg Finance L.P., FactSet, ICE BofA Merrill Lynch, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Based on Bloomberg Barclays US Aggregate Credit – Corporate Investment Grade Index (US IG), Bloomberg Barclays Euro Aggregate Credit – Corporate (Europe IG), J.P. Morgan Asia Credit Investment Grade Index (Asia IG), Bloomberg Barclays Global Aggregate – Corporate (Global IG), Bloomberg Barclays US Aggregate Credit – Corporate High Yield Index (US HY), Bloomberg Barclays US Aggregate Securitised – Asset Backed Securities (US ABS), Bloomberg Barclays Pan European High Yield (Europe HY), J.P. Morgan Asia Credit High Yield Index (Asia HY), ICE BofA Global High Yield (Global HY), J.P. Morgan GBI-EM (Local EMD), J.P. Morgan EMBI Global (USD EMD), J.P. Morgan Asia Credit Index (JACI) (USD Asia Credit), J.P. Morgan Asia Credit China Index (USD China Offshore Credit). Duration is a measure of the sensitivity of the price (the value of the principal) of a fixed income investment to a change in interest rates and is expressed as number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Indices do not include fees or operating expenses and are not available for actual investment. Yields are not guaranteed, positive yield does not imply positive return. Past performance is not a reliable indicator of current and future results. Data reflect most recently available as of 30.06.2021.
3. How to build a flexible fixed income portfolio2?
- Generally, bonds can help diversify portfolios as they exhibit low correlation to equities. There are various types of bonds globally and they react differently to market changes, such as interest rate movements and the economic cycle.
- A flexible approach can help identify the high-conviction investing ideas for a diversified fixed income portfolio.
- As market conditions evolve, investors, based on their objectives and risk appetite, can allocate across the full fixed income spectrum - traditional assets such as government and IG bonds as well as extended assets such as MBS4 and HY corporate bonds3 - can help build a resilient and diversified portfolio.
- Seek professional advice from active managers with a long-term view and global reach.
Explore income opportunities
Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice.
Diversification does not guarantee investment return and does not eliminate the risk of loss.
1. Yield is not guaranteed. Positive yield does not imply positive return.
2. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
3. High-yield credit refers to corporate bonds which are given ratings below investment grade and are deemed to have a higher risk of default. Yield is not guaranteed. Positive yield does not imply positive return.
4. Securitisation is the process in which certain type of assets, such as mortgages or other types of loans, are pooled so that they can be repackaged into interest-bearing securities. Examples of securitised debt include asset-backed securities (ABS) and mortgage-backed securities (MBS).
5. Source: Consumer Price Index Summary, U.S. Bureau of Labor Statistics. Data as of 13.04.2021, 12.05.2021 and 10.06.2021.
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